Declaration of Independence: Prior Material Breach Does Not Excuse North Carolina Solar Developer of Performance of Independent Promises under Agreement

In Recurrent Energy Development Holdings, LLC v. SunEnergy1, LLC, a North Carolina Superior Court addressed a dispute between two solar developers arising out of a letter of intent/exclusivity agreement. Under the agreement, Recurrent agreed to make cash payments in return for the exclusive rights to purchase certain projects being developed by SunEnergy1 and to negotiate in good faith regarding a tax equity investment in a separate project under development by SunEnergy1.

Upon SunEnergy1’s failure to meet certain target milestone dates on any project subject to an exclusivity payment, the agreement permitted Recurrent to demand the right to purchase a replacement project or, if none was available, seek a partial refund of the corresponding exclusivity payment. The parties’ relationship soured when unanticipated environmental issues arose on some of the projects and planned power sale agreements failed to materialize. When SunEnergy1 failed to meet the milestone dates on one project, Recurrent requested a replacement project and then, promptly, demanded a refund when no replacement was forthcoming. SunEnergy1 did not provide a refund.

However, prior to the partial refund dispute, the parties’ tax equity investment deal also fell apart. Both parties alleged breaches under the agreement relating to their respective obligations in the tax equity transaction. SunEnergy1, specifically, alleged that Recurrent did not comply with its express contractual obligation to negotiate in good faith, in part, because Recurrent’s pricing of the project for the transaction was well-below market value. SunEnergy1 also alleged that its obligation to issue a partial refund of the exclusivity payment was excused by Recurrent’s prior material breach of this duty of good faith (note: the doctrine of prior material breach provides that if either party to a contract commits a material breach of the contract, the other party may be relieved from the obligation to perform further). The North Carolina court addressed these and other arguments on cross-motions for summary judgment by both parties.

With respect to the partial refund, the court found that Recurrent’s alleged prior material breach did not circumscribe SunEnergy1’s obligation to refund a portion of the exclusivity payment. The court reasoned that a contract may have multiple covenants, some of which are dependent and some of which are independent of one another. In this case, the contract did not connect or link the refund of the exclusivity payment with any obligation of good faith associated with the tax equity investment, so the doctrine of prior material breach did not excuse SunEnergy1 from issuing the refund.

Solar development deals commonly involve the sale or construction of multiple projects at one time to take advantage of certain financing and tax considerations. Agreements memorializing these deals may be hashed out quickly or developed in phases as the relevant projects reach certain financial, permitting, design or other milestones. This North Carolina opinion highlights the need for careful drafting of development agreements to allocate parties’ respective rights and obligations clearly regardless of the complex, fluid, and fast-paced nature of these transactions.

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